05/19/2012 DON'T PANIC!!!! ;-)

Condition	Bear Market
S&P Target	1240
Small Portfolio	IAU & XLF	4.68%
Hedge	XLU	-3.13%
Position	Date	Return	Days	Call
GCI	7/14/2011	-1.82%	310	Hold
CSGS	10/3/2011	29.51%	229	Hold
NLY	10/25/2011	5.42%	207	Hold
DD	10/27/2011	6.69%	205	Hold
KBR	10/27/2011	-9.54%	205	Hold
VG	10/27/2011	-48.33%	205	Buy
TTM	11/30/2011	40.05%	171	Hold
BT	1/4/2012	2.82%	136	Hold
PDLI	3/7/2012	1.48%	73	Hold
CLF	3/19/2012	-31.76%	61	Hold
S&P	Annualized	-3.83%
Small Portfolio	Annualized	4.83%
Mousetrap	Annualized	5.37%
Hedged	Annualized	2.14%

On a week like this one, it’s important to take a step back when looking at the state of the market.

We are now 62 points down on the S&P from the point that I said the “Bear Market Rally” status was changed to “Bear Market.”  My timing is a work in progress, so I don’t aggressively short.  Eventually perhaps I will.

So what do my timing indicators say?  Well, they are still mixed.  My yield ratio model is treating this as a correction in a bull market, with a bottom around 1265 on the S&P.  An alternate low on that model could go as low as 1205.  Not the tightest of ranges, but not the end of the world either.  The expected gain for the next year is 19.10% on the S&P from Friday’s closing price.

My sector configuration model shows that a normal bear market rotation could go as far as 900, but a bull correction would have us higher just a month from now.  The expected gain for the next year is 19.98% on the S&P from Friday’s closing price.

The outlier on the models is the 900 reading.

The more probable reading has us close to a bottom (if 5% is close), with a reasonable expected gain for long positions that are held over the course of the next year.

Nevertheless, as long as the money-flow is strongest in the bearish sectors, there isn’t much use puzzling over whether this is a “Bull Market Correction” or just a “Bear Market.”  A “bottom” normally shows up as a panic washout.  On Friday, for instance, the Nasdaq up volume was 37% and the down volume was 62%.  That’s hardly a panic washout.

On a bottom we also see some sector rotation as market bounces a time or two.  We haven’t had a panic, we haven’t rotated, and we sure haven’t bounced.

The Mousetrap is 12 days away from the completion of the beta test, and I still have not found the correct holding period.  That’s a good thing!  If the correct holding period is greater than a year, the model will reach one of its primary goals as a Low Frequency Trading algorithm.  Right now it appears that a year holding period should outperform the S&P on average by 15%.  The 9.20% outperformance shown above is because I was rotating the stocks too quickly.

Human error cost me almost 6%.

I do not plan to continue that process.  15% is more attractive.

The market is getting ready to panic.  Probably not a big deal.  Yes, Europe scares the hell out of me too.  I don’t see how we can possibly survive.  My instincts tell me to buy gold and run for the hills.

Eh… being hedged is probably good enough…

Tim